The ASX has turned around its fortunes, boosting 35 points, while David Jones has surged 5% despite a 5.9% fall in net profit.

Rates are set to fall but homeowners are being warned not to loan too much.Source: News Limited

INTEREST rates are tipped to fall to a fresh record low of two per cent within six months as the central bank warns financial institutions must maintain prudent lending criteria in the low-interest rate environment.

In its half-yearly Financial Stability Review, the Reserve Bank said there are signs households have an increased “risk appetite” for property and equity investments after the recent run of rate cuts pushed the official cash rate to a 53-year low of 2.5 per cent.

Self-Managed Superannuation Funds were singled out as needing particularly close monitoring in the coming months as they often invest around 15 per cent of their portfolios directly into the property market.

SMSF’s represent about one-third of the $1.6 trillion superannuation sector — up from 9 per cent in 1995.

Despite the increase in offerings of risky 95 per cent loan-to-value-ration offerings — which allows borrowers to provide only a 5 per cent deposit — the RBA review released on Wednesday said that so far the major banks have maintained their lending standards

But rising concerns about a property bubble as prices are up nationally around 6 per cent in the past 12 months, pushed the central bank to warn lenders not to respond to pressures to boost revenue by offering loans that borrowers won’t be able to finance as rates move up again in the coming years.

Despite falling in recent years, Australia’s household debt-to-income ratio still stands at 147.3 per cent — higher than the US levels ahead of the subprime crisis, according to the most recent data.

“There are some signs that households are taking on more risk in their investment decisions. While increased financial risk-taking is an expected outcome of lower interest rates, it is important that households understand, and appropriately account for, the financial risk they take,” the RBA report said.

“Given that household indebtedness and gearing are still around historically high levels, continued prudent saving and borrowing behaviour would help support household’s ongoing financial resilience.”

This official warning comes as economists expect the RBA to cut rates again this year as unemployment rises and growth in the non-mining economy stalls.

Westpac chief economist Bill Evans — the most successful interest rate tipper in recent years — expects the strong Australian dollar will force the RBA to cut again as early as Melbourne Cup Day with a follow-up cut of another 25 basis points in the first quarter of next year.

Official interest rates are tipped to then stay at 2 per cent throughout 2014.

“These cuts should gradually push the Australian dollar back to around US84c by the end of next year,” Mr Evans told the annual Housing Industry Association conference in Melbourne on Wednesday.

“But the global outlook is a major concern as the US economy will face another year of underperformance, China will disappoint next year and Europe is likely to record a third consecutive year of recession. This will leave the Australian economy sluggish and force the RBA to act.”

Westpac is forecasting the jobless rate will peak at 6.5 per cent mid-next year. The national unemployment rate hit a four-year high of 5.8 per cent last month.

Mr Evans was the first economist to correctly tip the current easing cycle, which has seen the RBA cuts rates eight times since it began in November 2011.

Westpac is less optimistic about the economic outlook than the official Treasury and RBA forecasts, tipping the Australian economy will record growth of only 2.5 per cent this year followed by 2.3 per cent growth in 2014.

The RBA and Treasury are expecting growth of 2.75 per cent for 2012-13 and 2.5 per cent the following year.

Despite the recent surge in business confidence that greeted the Coalition’s election victory, Mr Evans said this could take up to 12 months to translate into the increased investment and job creation needed to lift consumer confidence.

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